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Gift Tax 101

August 1st, 2023

This article was written by Heather Leggiero, CPA, Partner & Megan Giordano, Assistant Accountant.

It is essential to discuss what a gift tax return is, what information is reported on a gift tax return, and when it needs to be filed. Gifting is a way for taxpayers to pass their wealth onto others tax free. Taxpayers are allowed a lifetime exemption, $12,060,000 in 2022, charitable gift exclusions and medical and education gift exclusions. Although tax may not be owed, a gift tax return due by April 15th of the following year of the gift may still need to be filed.

The gift tax regulations define a “gift” as “a transfer of property for less than adequate and full consideration.” Any gift in excessive of $16,000 in 2022 must be reported on a gift tax return, even if no tax is due. A gift tax return is a form, IRS Form 709, that must be filed when a taxpayer gifts more than the gift tax annual exclusion ($16,000 in 2022 and $17,000 in 2023) to one individual. The gift-giver, commonly referred to as the donor, is responsible for filing the gift tax return and paying any tax due on the transfer. Any direct gift made that does not exceed $16,000 and $17,000 in 2022 and 2023 respectively will not reduce the taxpayer’s lifetime exemption.

Each taxpayer is allowed a lifetime exemption of $12,060,000 in 2022, which increased to $12,920,000 in 2023. This exemption is the amount of property the taxpayer can give away within their lifetime without having to pay any gift tax. Gift tax is not due on any gifts made until the taxpayer has gifted over their lifetime exemption.

Once there is a gift tax return filing requirement, any charitable gifts made must also be reported. Charitable gifts do not reduce the grantor’s lifetime exemption as these gifts qualify for the charitable gift exclusion. However, they should also be reported on the gift tax return. In addition to the charitable exemption, there is a gift tax exclusion for payments of medical and tuition expenses of another. The exclusion only applies when qualified payments are made directly to the medical care provider or educational institution.

After the taxpayer has made the gifts and determined a gift return needs to be filed, a few pieces of information are needed.

Recipient Name, Address, and Relationship to the Taxpayer

The relationship the recipient has with the taxpayer in some cases will determine how the gift is reported. For example, a child receiving a gift can be reported differently than a grandchild receiving a gift. In the event a trust is receiving the gift, the trust agreement must be provided to determine how the gift should be reported.

Description of the Gift

A detailed description of the gift is reported on the return. For real estate a legal description of each parcel, the address and a statement of improvements made should be reported. For stocks and bonds, the CUSIP number should be reported as well as a detailed description of the stock and/or bonds (see Form 709 instructions).

Donor’s Adjusted Basis

The basis reported should be the basis used for income tax purposes. For example, for tangible property use cost plus improvements less depreciation.

Date and Value of the Gift

Gifts come in various forms, including cash, vehicles, real property, life insurance, shares of stocks or ownership in a business. The valuation method used will depend on the type of property gifted. For example, if a partnership interest is gifted a valuation by a qualified appraiser would be required.

Once you have your return information, you may also need to provide some additional documentation to your tax preparer to attach to the gift tax return. For example, valuations should be attached to the return. Valuations can take several forms such as a qualified appraisal of real property, valuations of business interests and Form 712s for life insurance transfers. In addition, if transfers to a trust are made, a copy of the trust agreement should be attached.

As tax laws continually change, taxpayers should take advantage of the increased lifetime gifting exemption. Remember, gift tax returns are due April 15th and can be extended automatically with the extension of your individual tax return or with Form 8892. Don’t wait, get your gift tax return filed early. Happy gifting!

The Bonadio Group’s Estate & Trust team has years of advisory and tax experience. Please do not hesitate to reach outto our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Jess LeDonne
Director, Policy and Legislative Affairs